What are the inputs needed for a proper share-of-wallet calculation? At a recent meeting of The NeuGroup’s FX Managers’ Peer Group (FXMPG), one member, who is tasked with coming up with a model for estimating his company’s total treasury wallet and building a process for how to use it with partner banks, gave a rundown of the process. Other members revealed where their money was going in the group’s pre-meeting survey.
Overall, the presenter’s company is reducing the number of banks and bank accounts, and is seeking to have fewer but deeper relationships with best-in-class partners as a result of the next credit renewal.
In the pre-meeting survey, members cited service fees, FX trading volumes, cash management volumes, investment volumes, debt activity, M&A services, share buyback commissions, letters of credit and guarantees, 401(k) fees, credit card fees and retirement plans as items that get included in wallet analysis. Members also think that the liquidity one has with a bank through deposits or cash-management flows should be assigned some value, at least in the MMF yield range.
FX is not always given to credit banks
Also in the pre-meeting survey, competitive pricing and counterparty risk were much more common determinants (over 90 percent) for allocating FX business to a bank than debt-facility participation (about 60 percent). Many other things play a role in allocating FX business, and credit is a ticket to the dance, not a guarantee for business. Certain currency pairs can be the expertise of a non-credit bank, for example. Counterparty risk concentrated with just a few banks may also prompt a trade to go outside the bank group.
Estimate profits or revenues
Between bank regs, capital buffers and internal considerations, it’s very hard to estimate levels of profitability on any one company’s business for a bank. However, in a model, some estimates by the nature of the business have to be revenue-based (cash management has negotiated prices per service, for instance), and some an educated guess on how many basis points a bank might make on simple and more complex FX trades. If you have a good relationship with a banker, opportunities might arise to get insights on pricing and profit models if they are changing banks, for example.
In the continuing shake-out of corporate-bank relationships (where increasingly the emphasis for corporates is on partnerships and finding the banks that will fit their needs, and for banks to do business with them in a profitable way), both sides are taking a more granular look at what the relationship looks like, what it costs and what value it brings. As a result, share-of-wallet analysis and performance-tracking have been subjected to closer scrutiny in recent years, and will continue to be valuable tools in doling out the treasury wallet appropriately.